Late last year I was invited to Christmas drinks at Ed Balls in Westminster, along with other bloggers and lobby journalists. It wasn’t a swanky affair – held in his small office in Portcullis House – and Cameron had decided to hold his drinks on the same evening so it wasn’t a big throng either. I rarely get a chance to ask him questions so I decided to say hello just before Mr Balls left for the night. Roughly, this is how our brief conversation went.

I said: Hi Ed, Labour has been criticised by many, including myself, for not going far enough on financial reform as all we’ve done is signed up to the watered-down Vickers Report (same policy as the Conservatives). Don’t you think Labour should be doing more to break up and tackle banks that are ‘too big to fail’?

Ed B replied: Well, we are always going to have some banks that are too big to fail – you cannot avoid that. What we are doing is trying to ensure there is separation between casino banking and retail banking, and that banks have enough capital kept as collateral so they are more insulated from shocks.

This response agitated me. Neither of those conditions would prevent another financial collapse (Lehman Bros was entirely an investment bank) and this was exactly what the Conservatives said they were doing. We were copying them.

I replied: Ok, let me put it another way. We both agree we need more competition in the banking sector to ensure there isn’t an oligopoly of big banks that have most of the market. That would also reduce risk making it less likely that we have to bail out banks. So what are we doing to encourage more competition in the banking sector?

Ed Balls replied: Good question Sunny, good question. I have to go now but we’ll have to come back to that discussion.

And that was it.

I was gob-smacked. It wasn’t clear how Labour was proposing to be any different to the Conservatives on financial reform, and show how it had learnt from previous mistakes. If the banks collapsed again under a Labour government in 2018 we would have a credit crunch and a bail-out all over again.

I say this because the publication of Anthony Sheldon’s letter in the New Statesman – and responses by Mark Ferguson and Jonathan Freedland – have raised the question of whether Ed Balls should remain the Shadow Chancellor going into the 2015 election. I’m sure he will, but I don’t think he should.

To make my point a different way I want to ask a question of fellow Labour party members. Let’s say you meet a voter on the street and she asks: “what are Labour’s plans to create over a million meaningful jobs (not workfare ‘jobs’) and what has Labour learnt from the financial crash” – how would you respond? I suspect most of you would struggle to respond. I would struggle to respond. I bet even the Fabians and IPPR would struggle to respond.

That is because the Labour party has no clear answer yet. During the Labour leadership election Mr Balls gave a speech at Bloomberg that was widely applauded because it argued that austerity would hurt the economy as it would bleed a patient when it was ill. He was echoing what many of us on the Left had been saying – and we have all been proven right.

But the problem is that since then Mr Balls has become extremely timid and scared of being labelled a ‘deficit denier’. The entire shadow cabinet has been barred from talking about any policy that would require spending money. Mr Balls himself talks about the need to make cuts but never about the need to borrow cheap money from the financial markets and stimulate the economy – as any sensible economist would advocate now.

Similarly, there is no talk of major financial reform at all. We have some tinkering – which even the Conservatives are happy to support – and a National Investment Bank. He won’t even commit to the Robinhood Tax on financial speculation.

It’s understandable that Labourites don’t want a civil war going into 2015; the hunger to defeat the Conservatives is too strong. But what are we fighting for when we have little to say on the two biggest issues of our generation? Ed Balls is likely preparing to sign up to Conservative austerity plans past 2015. Are we going to convince voters we have changed and offer a clear alternative simply by offering to cut spending slightly differently?

Mr Balls does have a lot of critics within the Labour party. Lord Glasman warned of Ed Balls’ timidity over a year ago; many in the trade unions too haven’t forgotten his appeal to fiscal conservatives with a 1% public sector pay freeze pledge. They are silent because they want to ensure we don’t distract from the Coalition’s failures. But we need to have a debate about Ed Balls’ timidity now rather than six months before an election. We should be asking now about Labour’s big policies that match Ed Miliband’s speech last week.

We cannot carry on pretending Labour can create meaningful jobs, have a more responsible capitalism and cut inequality without serious financial reform. The case against Ed Balls isn’t that he is too tainted by the last administration, but that he remains a City-friendly technocrat who is unwilling to push the bold ideas the British economy needs.

Reader comments

It seems to me that nothing will change in the banking sector until politicians themselves live and breath the idea that the pursuit of vast personal wealth is unacceptable and that promoting ‘competition’ and ‘success’ is less important than co-operation and social welfare. In short, they are all too rich and selfish and have both eyes on their post-parliamentary directorships and a multi-million pounds retirement funds. http://www.sirisuk.org

Actually no. All that’s proven is that doing what GO has done lands us where we are now. No alternatives have been proven better or worse, it is just speculation.

America with its larger deficits is doing marginally better growth wise (although worse if you were to compare unemployment), Germany with its smaller deficits is also doing better growth wise. I’m not arguing for either merely pre-empting anyone using examples from other countries as some sort of “proof” of what might happen here.

As for the main gist of the article, even if Balls had a plan the majority of the public wouldn’t know it. If he needs to go it’s (similar to Miliband) because people don’t like him, don’t like his voice, his face or his style. It’s that shallow.

Whatever Sunny might like to think if Labour got in tomorrow there’d be no noticeable difference. Deficit’s already 8%, there’s no wriggle room for additional spending. I remember the left celebrating Hollande’s victory not so long ago, those manning the barricades have yet to be impressed!

Regardless of whether one likes Ed Balls can I assume that it is agreed he a knowledgeable economist and understands how the Treasury & financial markets work.

There are three specific issues Sunny mentions he thinks Labour should be campaigning on:

1) Breaking up banks further than the coalition’s current plans.
2) A Robin Hood tax
3) Borrowing more money to invest in XYZ

Sunny sums these (specifically just one, but I assume all three) up as policies “any sensible economist” would advocate.

Can I just throw a thought into the air. The fact that neither Osborne, nor Vince Cable and nor Ed Balls is advocating any of these policies is that they might actually not be good ideas in practice.

Ed Balls has been in and around the Treasury for ten years and has thought about these things. Perhaps he genuinely thinks that a Robin Hood tax isn’t in the UK’s best interest. And that borrowing more than the current £120bn deficit isn’t practical economics and that a looser fiscal policy would just result in a tighter interest rate environment. And that the Vickers reforms are sufficient at the moment and that further reforms aren’t practical whilst banks remain so weak.

Just because these are also the Coalition’s policies doesn’t make them automatically wrong.

And there is still plenty of room for a significantly different Labour economic policy than the Coalitions. Far more progressive taxation, wealth taxes, higher minimum wage, workers on renumeration committees, national investment bank etc.

banks have enough capital kept as collateral so they are more insulated from shocks ….Neither of those conditions would prevent another financial collapse

actually, sufficient capital would prevent another financial collapse, in the extreme a 100% equity backed bank cannot go bust. For an extreme idea in that direction: limited purpose banking

It is a mistake to underestimate the importance of higher capital requirements. If Labour really wants to do something about financial risk, being significantly more demanding here would be a major move. I think Basel wants 7%, the authors of Bankers New Clothes argue for 20-30% and to end the practise of risk weighting assets.

We cannot carry on pretending Labour can create meaningful jobs, have a more responsible capitalism and cut inequality without serious financial reform.

so “serious financial reform” is what it all comes down to is it? First, I don’t think that’s right. For example, helicopter money funded fiscal expansion and cash handouts could create jobs and cut inequality, with no change to the banking sector required. Moving to Limited Purpose Banking, for example, would be an incredibly serious financial reform, but I don’t see how it would create jobs (might help with inequality).

So what are these “serious financial reforms” that will create jobs and cut inequality? The Robin Hood Tax would achieve sod all with respect to financial stability (something like a tax on bank leverage would achieve more) and any tax revenue it raises are just tax revenues like any other. Breaking up the banks doesn’t help if they all copy each other, leverage up during booms, then all go bust at once. Can’t see how it would create jobs either.

But isn’t your point actually that you’d rather Ed Balls acted more like a politician than an economist ?

There’s no doubt that breaking up the banks further/Robin Hood tax etc would appeal strongly to Labour’s core and probably well beyond. It would be popular stuff. It could win a general election.

However Balls, wearing his economics/techocratic hat, rather than his political hat, thinks that these aren’t the right policies for the UK. And it wouldn’t be to his or Labour’s long term advantage to commit themselves to bad policies just in order to reap an immediate political reward.

(Of course, he could be wrong that these are economically bad policies; but the fact that all three major parties, and the Treasury mandarins, and the Vickers Commission and the Bank of England don’t appear to support them suggests that he, and they, probably aren’t all wrong).

Some of these criticisms would be applied to anyone who did the job. For example, it would not be very clever to let the Shadow Cabinet go around making dozens of spending commitments in response to every cut and news story. There has to be control over this and this is a key part of the job of any Shadow Chancellor (other members of the Shadow Cabinet will whinge about this.

The 5 point plan is explicitly about borrowing more to stimulate the economy. There will be more detail closer to the election with policies which are relevant to the situation at the time – setting out too much detail too soon just risks being irrelevant as the situation changes (imagine if the Tories have unveiled a radical economic plan in March 2008 for Labour to spend two years unpicking).

Ed Balls’ fiercest critics within the Labour Party are the Blairites and the Blue Labour people – i.e. people criticising him from the Right.

For example, I looked back at Glasman’s attack on Balls which you mention – he criticises Balls for adopting a Keynesian economic policy, asserts that Labour spent too much while in power, and thinks that flexible labour markets and free movement of labour are ‘crap’. The Blairites are upset that he didn’t give in to Osborne’s economic strategy from day 1.

I don’t see the point of all this stuff trying to stir up divisions and undermine Ed Balls when any conceivable alternative would be worse.

I’d like to think that Sunny and the rest of the Labour luke warm are finally waking up to limits of capitalist politics. But sadly with the accent of this piece being focused on personalities I think not.

Big issues do not provoke much debate and triviality consumes the political bubble. Whether Balls or some other fights the next election as SC, is not going to change the issues that confront an incoming government. They are going to spend the entire duration of the next parliament trying to tightly control public spending i.e. cut in real terms. Therefore, they will still be doing in 2020 what they will be doing in 2015. Whether it is a Labour or Conservative government will not make a fundamental difference to the numbers. Anyone who thinks an incoming Labour government is going to lead to a spending splurge is living in a fantasy world.

One would expect a Labour government to change the distribution of who is worst affected by spending cuts and tax rises. They will probably spend more on infrastructure capex and a social housing building programme. However, they will not radically differ on government consumption public spending or public sector salaries.

Of course party activists would give their Shadow Chancellor a whole list of more radical policies that they would like. Rhyming them off at party conferences is a sure fire way to obtain cheers from other party activists. However, party activists would lead their parties to electoral ruin. Conservative activists would lead the Conservative party to ruin and likewise so would Labour activists. Both groups are further to the right and left of where their parties can win. With the fall in mass membership of political parties only the jihadist ultras are left.

The most important quality for a Shadow Chancellor is credibility. Whether labourites like it or not when people speak about credibility, they mean credibility with the City and international fund managers. Credibility with the bloke on the no 11 bus is not what they mean. Although Balls is tainted by his time in the last government, he still has the advantage of retaining credibility by understanding the issues. Apart from possibly his wife or Rachel Reeve, there is not a great deal of strength in depth that would seem an obvious alternative chancellor choice.

I was often critical of John Healey as the Shadow Health Sec, and I think I was justified. The choice of Healey showed that Milliband was not, at that time, up to the job of choosing a cabinet. (Alan Johnson as Shadow Chancellor! I rest my case.) Things have changed, Ed has made the right choice for the Health role, and indeed, for the Shadow Chancellor role (but, sadly, a weak choice for Education, and I wonder if it would be better to have Cooper in Education, but then anyone is better than the hapless and ineffectual Twigg).

Balls is the right choice for the Shadow Chancellor role. And the fact that he is number one choice for the Tories’ hate figure proves he is doing something right. Your complaints basically boil down to the fact that Balls would not tell you what Labour’s plans for the economy would be for the 2015 election. Well, that says more about you than Balls!

But the problem is that since then Mr Balls has become extremely timid and scared of being labelled a ‘deficit denier’. The entire shadow cabinet has been barred from talking about any policy that would require spending money.

Which is an argument against the entire shadow cabinet not just Balls.

Well, we are always going to have some banks that are too big to fail – you cannot avoid that……I replied: Ok, let me put it another way. We both agree we need more competition in the banking sector to ensure there isn’t an oligopoly of big banks that have most of the market.

Sunny don’t you get it?

Balls does not remotely agree with your statement, nor does any other mainstream politician. He walked away because he thought you were either hopelessly naive or having a laugh.

Because if there were real banking competition the financial/political cartel would not be able to syphon off the massive excess profits they currently steal and enjoy from the productive element of our economy. Instead, they might actually have to add some value.

I’m sorry for your humiliation, but it’s clear from your report- he took you for a tosser.

Let’s be honest, he is and will remain a big player because he’s part of the Labour elite. You know the sort. PPE at Oxford, advisor, elected to parliament then fast-tracked into the cabinet while regular MPs slave for decades with no recognition on the backbenches. I’d imagine it’s like that in the other parties too and it’s a big part of what’s wrong with our politics.

As mentioned several times before, in 2003 Warren Buffett warned about the trade in derivatives in financial markets:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.” [BBC website]

Back in 2002, Charles Goodhart was warning about about the house-price bubble:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ” [Telegraph website]

Treasury officials blocked reform of the banking industry in 2000, despite a pledge by Gordon Brown, according to the author of an influential government-commissioned report.

Donald Cruickshank’s report into competition in UK banking, commissioned by the Treasury in 1998, provoked a furore when it was published in March 2000. It attacked the banks for overcharging personal and small business customers by up to £5bn a year, and was particularly critical of the way the banks treated small-business customers…

Despite extensive web searches, I’ve found it impossible to retrieve a copy from the internet of The Cruickshank Report on: Competition in the UK banking industry. But this summary gives a flavour:http://competition.practicallaw.com/7-101-1508

There are interesting questions about why it has proved so difficult to retrieve a copy of a report commissioned in 1998 by George Brown when he was Chancellor. The report was published in March 2000. At that time, Ed Ball was Brown’s chief economic adviser.

You would like to thimk so wouldn’t you but why doesn’t Labour put its money where its mouth is and cut a deal with the Liverals to end this now and choose a different direction rather than wait for years? I genuinely don’t understand. The only viable explanation to me I’m afraid is that the little boy is bullshitting and that in power he would do exactly the same. I would really like to be wrong but it would take real moves of inspiration for me to pick up any hope at all.

” Labour put its money where its mouth is and cut a deal with the Liverals to end this now and choose a different direction rather than wait for years? ”

1. Because they would also need the support of other parties, including the northern Ireland ones. Therefore requires too many concessions that would hurt the long term interests of the labour party (constitutional change)

2. Because if they did so, it would be seen as a coalition of the losers – tories are still largest party. This becomes less of a factor with time.

3. Because the coalition is already unpopular with 80% of the cuts still to come – indeed if housing benefit changes start a crisis in the buy to let market even the financial sector will start screaming. When big society fails to materialise and local government services simply die due to the cuts even the south of England will start seeing labour support rise. Another 18 months of opposition will start seeing labour support back into the 3 figure majority range.

[…] of the core articles of faith which have been so damaging. Both major parties also have a religious faith in the free market fundamentalism of the Great Moderation. Both have been captured by financial […]